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A matter of taste

As breakthroughs in nutritional science challenge assumptions that have driven global food producers to create products loaded with salt, sugar and hydrogenated fat, the industry looks ripe for disruption.

12 minute read

Sausage rolls produced by the UK bakery chain Gregg’s are the stuff of legend; “pure comfort”, according to reviews online. So, news that the company has developed an award-winning vegan wrap, and sales growth is being fuelled by the company’s healthy eating options, says a lot.1

“Consumers are increasingly shifting towards “no bad stuff” foods, according to the data provider IRI, which surveys the UK food retailing market.2 That means “no bad stuff” in how products make it to the shelf, and in what they contain. Those loaded with salt, sugar and additives are being scrutinised, while there is growing interest in fresher, healthier alternatives.

Grappling with the obesity epidemic

Not before time, perhaps? The UK has a problem with obesity, and it is not alone. The number of obese people has tripled worldwide in the last forty years. Within the OECD, it is an epidemic: more than one in two adults and one in six children are classified as overweight or obese.3 This has worrying implications for a range of debilitating conditions associated with excess weight. More heart and liver disease, more hypertension, more strokes and Type II diabetes – all conditions that are now appearing in younger populations than in the past.

Outside the OECD, the picture is similarly unsettling. Although a billion people have emerged from extreme poverty in the last two and a half decades,4 the nutritional challenge is far from over. In Brazil, for example, using social welfare to top up the incomes of the poorest has been exceptionally popular since its introduction in the early 2000s, opening the way for consumers to buy cheap, processed foods.

These are foods perceived to be of high quality; they won’t be adulterated or go off but are often high in hydrogenated fat, sugar, salt and preservatives, and low in traditional ingredients like unrefined grains and beans. In a complex geography, more than half the population are now overweight5, but obesity and hunger co-exist.

The problem of under-nutrition is still immense. It’s still the cause of half the deaths of children under five globally.

Alexandra Rutishauser-Perera, Action against Hunger.

“The problem of under-nutrition is still immense,” says nutritionist Alexandra Rutishauser-Perera from Action against Hunger. “It’s still the cause of half the deaths of children under five globally. But many low and middle-income countries also face the problem of obesity.”

Facing over- and under-nutrition simultaneously is a ‘double burden’ – alarming for public health workers, already grappling with health emergencies. But over-nutrition is the greater of the two problems, affecting 1.9 billion people worldwide over the age of 18.6

Just a little comfort eating?

While more people struggle with their weight, food fads abound and there is “widespread distrust” in the claims being made by food producers, according to market research company Mintel.7 (Bear in mind that just one fast food company – McDonalds – spent over £96 million promoting its products in the UK in 2017,8 more than twice the ‘healthy marketing’ budget of Public Health England for the same year.9)

This makes it extraordinarily difficult for consumers to settle on good dietary choices, particularly when the messages are not clear. Even simple ones, like ‘eat more fresh fruit and vegetables’, can mean at least five portions a day (as recommended by health authorities in Germany, Spain, New Zealand, Chile and Estonia), six a day (in Denmark), ‘two plus five’ (two portions of fruit and five of veg, as in Western Australian guidelines) or ‘more’, as in the US, which recommends that fruit and veg make up around half of a notional plate. Half without chips, the guidelines point out, just in case anyone sneaks those into the ‘fresh’ potato category.10

What about specific guidance from doctors? They may lack nutritional training, and the range of advice is striking. A ‘low carbohydrate’ diet for a Type II diabetes sufferer might mean four per cent of daily energy intake from carbs, or 40 per cent – depending who you ask.11

Confusion abounds, resulting in complex and sometimes debilitating relationships with food. Consider the results of a US study of 2,200 undergraduates, titled “Food and life, pleasure and worry”.12 This survey, led by Paul Rozin, a psychologist at the University of Pennsylvania, reported 28 per cent of respondents stating they would prefer to take a nutrient pill rather than eat, and 14 per cent “too embarrassed” to buy a chocolate bar in a shop.

Cut to the facts

So how have we arrived in such a difficult place? Why are the messages quite so confusing and contradictory?

One surprising factor to bear in mind is that nutritional science is quite young, as the timeline in Figure 1 shows. Although studies into the effects of using dangerous food preservatives like boric acid took place in the early 1900s13, rigorous, randomised clinical trails involving large numbers have only become widespread since the 1990s.14 And it is only since the millennium that it has become apparent diet and food patterns are much more significant for the development of chronic disease than focusing on single nutrients. Of course, the whole area has had a difficult history, with vested interest groups making challenges and counter-challenges, as the science has evolved and regulators have stepped in to raise the consumer protection bar.

Detailed assessments of nutrients, foods, diet patterns and health outcomes are relatively new and scientists still do not fully understand all the complexities. One beautiful illustration of this can be found in what we know about the humble carrot, described by Michael Pollen, a lecturer at the University of California. He has written extensively on nutritional choices in his book, The Omnivore’s Dilemma.

“They still do not fundamentally understand what’s going on deep in the soul of a carrot, what makes a carrot a healthy food,” he says. “The essence of a carrot…Is it the beta carotene? That’s what they thought. But they took the beta carotene out of the carrot, and it didn’t work as a supplement. So, there’s something else going on in the carrot. They may get it at some point. But they still don’t know what it is.”

It is generally thought now that the beta-carotene and alpha-carotene contribute to the functioning of the immune system, while falcarinol and other polyacetylenes are being investigated for possible anti-inflammatory effects.15 This means engineers can blast a Tesla into space, but the secrets of the carrot are still secret, even though we have eaten carrots for several thousand years.

Meanwhile, the ‘old’ focus of nutritional studies – on single nutrients and on recommended daily averages – are inadequate. They form the basis of most traditional nutritional guidelines, but are a-contextual and fail to reflect the way in which food is produced; chemically altered by processing and combined on the plate.

“They don’t distinguish foods from food products,” explains Professor Carlos Monteiro from the School of Public Health at the University of Sao Paulo, an advisor to several United Nations panels on diet and health. “For instance, at the basis of the list of food that should be eaten in greater quantity, we have cereals and cereal products, because they provide carbohydrates. Recommendations assume the carbohydrate in a grain of corn or wheat, in bread, in breakfast cereal or even in muffins have the same impact on our biology – and we know today that this is not true.”

He argues there is a fundamental difference between the nutritional value of fresh foods, freshly prepared, and those that have been altered and artificially enhanced.

The next food revolution?

Against this backdrop, different areas of dietary concern have emerged. The human palate is drawn to sugar, and average consumption has risen sharply as more consumers choose sugar-laden convenience foods. Free sugars are being flagged as potentially addictive, disrupting the reward centre of the brain and contributing to the overconsumption of energy-dense foods.16 More work is needed on processed foods, to understand how the techniques used to create cheap, long-lasting ingredients (starches, hydrogenated fats, protein isolates, synthetic micronutrients) impact the body.17 There is also an intense focus on how bacteria in the gut might influence the immune system18, and how probiotics might interact with intestinal cells.

Research in these areas has sparked a revolution in thinking and investing in food. At one end of the spectrum, purists are suggesting it is time to get back to basics: back to traditional eating patterns and sustainable, less intensive agriculture. There has been a lot of dynamism at the grassroots level, with small food producers springing up to meet local demand.

At the other end of the scale, investment in applied technologies has been comparatively low in the food industry. Recently, agri-food start-ups have been successful in attracting funding to innovate, with US$10.1 billion of capital raised in 2017 alone. (Compare this with the US$2.36 billion raised in 2014)19 Large companies are also pouring investment into internal research functions and incubators, as Kraft Heinz’ Springboard project illustrates, to support new ideas. Areas of focus include improving resource use through precision agriculture, extending the use of hydroponics, reducing waste and keeping food fresh by managing the supply chain better, and developing meat and dairy substitutes, including insect and vegetable-based products.

Meanwhile, armies of researchers are working on how to take nutrition “beyond the diet, but before the drugs”.20 Nutraceuticals could potentially mean big wins for companies producing foods proven to promote health and prevent disease. Using stanols from plants to reduce the absorption of cholesterol in the gut; using curcumin, found in turmeric for its anti-inflammatory, antibacterial bacterial properties; or vinegar to improve insulin sensitivity in diabetes sufferers,could all fall in this camp. 21, 22 & 23

Incubator initiatives: searching for the next big thing

Example: Kraft Heinz – Springboard

Ayoba-Yo – alternative to traditional dried meat products, fearing a 14-day air-drying processCleveland Kraut –producer of sauerkraut, high in vitamin C and probioticsKumana – Venezuelan-inspired avocado sauce, and sauces with other flavours from around the worldPoppilu – antioxidant lemonade brand which has created beverages from aronia berries, a highly antioxidant fruitQuevos – salty, crunchy egg-white crisps, low in carbs and fat and high in protein

A new generation of ‘clean’ food products may also be on the horizon. Consider in-vitro beef grown from cells harvested from biopsies taken from anesthetised cows, now being explored by the Dutch start-up Mosa Meat.24 Using a process that is in development and backed by the German technology company Merck and Swiss meat processor Bell Food Group, there could be no need to kill the livestock.

Although discussions with the European Food Safety Authority are in their infancy, the environmental implications could be significant. Improving systems of protein production is an urgent global need, with the global population expected to tick up substantially by 2050, bringing a significant environmental load. (Remember that outside lush, naturally fertile meadows, producing a kilo of beef can use an astonishing 15,415 litres of water.25) A production system using less water, potentially less energy, less land, less antibiotics and producing less greenhouse gases ticks quite a few boxes – but of course raises important questions as well.

“One cell sample can create up to 10,000 kilogrammes of cultured meat, so we would not have to take biopsies very often,” explains Mosa Meat’s chief scientific officer, Professor Mark Post, who has already produced a ‘clean’ hamburger and is working to bring the product to the retail market by 2021. “Theoretically, we might need only 150 cows to satisfy the world's current meat demand. Of course, the herd would need to be larger than that to sustain the population, but far fewer than the 1.5 billion or so today. This means we can offer those cows much higher living standards.”

One cell sample can create up to 10,000 kilogrammes of cultured meat, so we would not have to take biopsies very often.

Professor Mark Post, Mosa Meat’s chief scientific officer

An industry ripe for disruption

The broader implication of these developments is that the food industry is on the cusp of enormous change, perhaps like the technology sector in the early days of the internet. Technological advances are likely to ripple through, challenging large, established food and drinks companies who built their scale through industrial food production techniques.

Their desire to create convenience goods with long shelf lives was a key driver in the past, when companies sought to spin out products across the globe. A small number were extraordinarily successful, scaling up to generate billions of dollars in sales every day, but they now face disruption as old truths are challenged.

In Brazil, for example, recently-drafted eating guidelines challenge industrial food processing head on.26 They take a holistic view of agriculture, considering the environmental costs of food production and the wider role food production and consumption play in society. This is a radical departure from the reductionist, nutrient approach. The Brazilian recommendations suggest making traditional fresh or minimally processed foods and culinary preparations from them the basis of the diet, actively selecting food brought to market by smaller producers, and stepping away from additive-rich, convenience foods.

“These ultra-processed foods are formulated not only to replace ‘real’ foods, but also to be consumed in excess, to become a habit, or even addictive,” according to Monteiro, “The recommendation should be – avoid.”

These ultra-processed foods are formulated not only to replace ‘real’ foods, but also to be consumed in excess, to become a habit, or even addictive,

Professor Carlos Monteiro, the School of Public Health at the University of Sao Paulo

This is a direct shot across the bows of food companies selling legacy-type, processed products. Take Kellogg’s, for example, a company selling into 180 markets worldwide. Its shares have lagged the S&P 500 for several years. The claims to have a ‘passion for nutrition’, but some of its products seem dated. The ingredients in the cereal Froot Loops are a case in point. At the top of the list – sugar. The product also contains artificial colours, hydrogenated vegetable oil and a cocktail of vitamins and supplements (A, B12, C, D, as well as folic acid, calcium, iron, zinc), but there is no sign of real fruit.

When optimal nutrition was all about fortification and free sugars were not ingredients to watch, this might have been acceptable. Not any more. After pressure from food regulators to reformulate with less sugar, Kellogg has promised to act, but sales of sweetened cereals are in decline. Even the supplements fail to chime with current health advice. “Our bodies prefer naturally occurring sources of vitamins and minerals,” says Monique Tello from Harvard Health Publishing.27

With these changes in the air, it is not surprising Kellogg’s has looked to build momentum in other parts of its business (a strong push into selling snacks in emerging markets), and sought ‘healthy’ bolt-on acquisitions. It recently acquired Chicago Bar Company, the makers of RXBar, an “all-natural” protein bar sold through gyms. These bars contain just a handful of high-quality ingredients, all spelled out in large type on the packaging. At a time of cynicism around food health claims, this seems a straightforward product, selling transparency. There was less than five years between the formulation of the concept to its sale to Kellogg’s for US$600 million,28 and TV reports suggest sales increased some 80-times over between 2014 and 2017.

M&A – opportunity knocks

“Most food companies in the US and globally are choosing to focus on ‘health and wellness’ now,” according to Aviva Investors’ US consumer analyst and equities portfolio manager David Bucolo in Chicago. “There have been a series of large acquisitions in this space, the most significant being Danone buying WhiteWave in 2017 for US$10.4 billion.”

WhiteWave specialises in dairy alternatives, including plant-based milks like Silk almond milk and yoghurts, as well as organic salads. Danone is seeking to take advantage of the shift towards vegetable-based diets, suggested to be better for health (less cholesterol and lactose) and the planet.

Most food companies in the US and globally are choosing to focus on ‘health and wellness’ now,

Buying one of the fastest growing food companies in the US came at a cost, however – a multiple of more than 21 times earnings, compared with an average of around 15 times for other dairy deals.29 Other recent acquisitions in the ‘diet and health’ arena include The Simply Good Foods Company buying Atkins Nutritionals (the company promoting Dr Robert Atkins’ low carb diet) for US$730 million, and The Campbell Soup Company acquiring organics specialist Pacific Foods of Oregon.

Over on the drinks aisle, Coca-Cola is also in the process of transition. The extension of sugar taxes designed to nudge consumers towards lower sugar consumption – in certain US states, the UK, Portugal, UAE, Sri Lanka, Ireland, South Africa, and others – has forced the company to step up efforts to reinvent itself.30 As the World Health Organisation is recommending this path, it looks like a trend that is unlikely to go away.

To put this in context, more than 30 countries now have forms of sugar tax in place, with uptake accelerating and introduction taking place at higher levels (see illustration below.) Nevertheless, their use is less extensive than for targeting smoking, where 180 countries have a tax in place.

“In these cases, the path to taxation was initiated by a consensus around the negative impacts to society and an assessment of financial costs to the public,” according to Abigail Herron, global head of responsible investment at Aviva Investors. “Behavioural taxes can help protect health and generate revenue.”

A single, traditional can of Coke contains around 35 grams of sugar; equivalent to around seven teaspoons, more than the standard adult recommendation for a day. With regulatory intervention, Coca-Cola’s strategy has been to market ‘diet’ formulations more heavily and target healthier or lifestyle brands. This is not a new trend, as sales of classic sodas have been declining in the US for some time.

Now the lighter formulations sell better than ‘full fat’ Coke in some markets, while the feel of the newer brands is different. GLACÉAU Smartwater was acquired for $4.1 billion in cash a decade ago, at a value close to ten times trailing earnings. Coca-Cola also added a majority stake in Innocent smoothies for an undisclosed amount in 2013 (“live well and die old” is its slogan) and ZICO coconut water, wholly acquired in the same year, reportedly for less than the Smartwater acquisition.

Although vitamin-enhanced water initially sold well, artificial enhancement has since fallen out of favour, particularly in products that also include artificial sweeteners like aspartame. Aspartame is widely used in ‘diet’ foods and beverages, (including Diet Coke), but it has become controversial due to the way in which its components (phenylalanine, aspartic acid, methanol) can impact neurotransmitters in the brain.31 In some products, it has been replaced by stevia, an alternative sweetener made from plant extracts, initially perceived to be a healthier alternative. But stevia itself is being investigated for the potential to be metabolically disruptive.32

Now, it’s more about products with ‘natural’ enhancement, hence the interest in coconut water, a “superstar of hydration”, according to the American Society for Nutrition,33 which is naturally rich in electrolytes. In its latest moves, Coca-Cola is diversifying into fruit juice and coconut blends, and taking on traditional street vendors by pushing ZICO into Thailand.

“The market for naturally-sourced health products among Thai consumers has increased exponentially, and the market for coconut water is forecast to more than double by 2020,” says Karaked Puribat of Coca-Cola Thailand. Double digit growth for packaged coconut water is expected in 2018.

So much for sugar and artificial sweeteners – how about additives like monosodium glutamate (MSG)? MSG is a flavour enhancer; it appears naturally in many foods, including tomatoes and cheeses, and has been cleared by the US Food and Drug Administration as “generally safe” for human consumption.34 It is often added to processed foods to enhance the taste.

A quick check of the share price of the world’s largest supplier, Lotus Health Group, shows the stock lagging the Hong Kong market and its sector; down more than 50 per cent in the last year.35 Why? Although the positive association between MSG and weight gain has been known in animals for a while, it is only comparatively recently studies have made the same association in humans.36 It seems MSG may disrupt leptin, the hormone regulating human energy balance and appetite, ultimately contributing to weight gain.

Even in China, where it used to be quite common to add MSG to prepared foods, sales are dropping away, as the healthier eating trend becomes more established among the Chinese middle class. “Consumers are more concerned about the harm salt and MSG will do to he human body than sugar,” notes Summer Chen from Mintel. That said, sales of chocolate have been declining as well, as shown below.

Keep it simple

While the food industry is apparently shifting towards ‘health’ (“almost every snack company on the planet”, according to Bucolo), it is worth taking a considered view of product claims. Almost one third of products in recent food launches made ‘natural’ claims; double the number a decade ago, and the market is hugely crowded.37 Environmental and ethical claims are being used more widely as well.

“We’ve never had more food or greater diversity,” according to the food writer Michael Ruhlman. “And we’ve never had more harmful food, and never had everything in such abundance.”

Navigating food choices is never going to be straightforward. Nevertheless, as science moves on, it is reassuring to know experienced nutritionists seem to be reverting to traditional dietary messages, suggesting diets broadly based on a variety of fresh foods, eaten in moderation. The wonderful simplicity of the thesis set out by Michael Pollan – “Eat food, not too much, mainly plants…” is a useful place to start, and a call to action for food producers still relying on the unhealthy appeal of foods high in hydrogenated fat, sugar and salt.

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IMPORTANT INFORMATION This document is for professional clients and advisers only. Not to be viewed by or used with retail clients. Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). As at 20 February 2019. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment. In the UK & Europe this material has been prepared and issued by AIGSL, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH, authorised by FINMA as a distributor of collective investment schemes. In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000, Australia. The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606 J39789-RA19/0214/20022020

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